Economic Watch

South Africans are overrating the ratings agencies

With the second of this year’s gut-wrenching biannual rating season of the major credit ratings agencies (CRAs) behind us, it is no time to relax but rather one for retro- and introspection.

There are good reasons for all stakeholders in the South African economic household to ask themselves: Are we not overestimating the influence and/or integrity of the CRAs?

On the one hand there is the danger that we might be concentrating or relying too much on pleasing the CRAs to ward off the danger of ‘junk status’. On the other hand, after the latest ‘stay of execution’, the danger is that we are not taking proper note of what is happening in the ‘real world’ of the investment market.

In the wake of the statement by Standard & Poor’s (S&P), the last of the main CRAs to complete their judgement on SA’s credit rating in early December, Professor of Political Economy at the University of the Witwatersrand, Patrick Bond, described the statement as “lacking logic and conviction”.

He also warns that CRAs “are dangerous institutions. Their mistakes can be catastrophic to investors and the broader economy. As the 2008 world financial meltdown gathered pace, for instance, they gave AAA investment grade ratings to Lehman Brothers and AIG – just before these companies crashed.”

The “main question to ponder is why, given utterly zany politics and the stagnant economy, South Africa was not downgraded all the way to junk, S&P lowered the risk rating of local state securities, but not the sovereign debt grade considered by foreign investors,” Bond writes.

Bond’s assessment echoes a report of a year ago on the website Global Treasury Intelligence (GTI), which on the issue of the 2008-09 reputational damage to the CRAs, concluded:

“Has the reputation of the global ratings agencies been restored to its former pristine state (if ever it was such)? Not exactly based on the evidence to date, which continues to trend negatively towards the agencies’ business models and practices.”

‘Support’ for Zuma

In both the Bond article and the GTI report President Jacob Zuma would find some support for arguments he has been putting forward lately with regard to CRAs and their processes.

In view of the dangers associated with the mistakes made by them, Bond states: “No wonder the Brazil-Russia-India-China-South Africa (BRICS) 2016 summit in Goa agreed to explore setting up an independent BRICS Rating Agency based on ‘market-oriented principles’ to ‘further strengthen the global governance architecture.’”

He, however, also points out that “given how poorly ‘market-oriented principles’ hold up in today’s chaotic world financial system, this strategy appears as serious as the BRICS’ alleged ‘governance’ reform of the International Monetary Fund in December 2015.

“Then, aside from South Africa which lost 21% of its vote, four BRICS members increased their IMF voting shares. This was mainly at the expense of poor African and Latin American countries.”

To put this forward as grounds for arguments of a ‘Western’ or even American conspiracy to victimise African countries, will however, not wash – neither will it for dodging responsibility and accountability or for finding a scapegoat for our domestic economic policy failures.

It is not only African or Latin American countries that have problems with how the present CRA arrangement (or regime, if you want) operates.

Europe has its own problems with the CRAs, and GTI reports that “more recent sovereign ratings experience in Europe is not suggestive of improved practices: EU officials argue that the major agencies exacerbated the European sovereign debt crisis by miss-reading the potential for wider support”.

In its December 2015 report GTI also notes that the “inherent conflicts of interest in the global ratings agencies’ business models have long been recognised, leading to discussion of US reforms dating back to 2002 and earlier”.

In a February 2015 report the Council on Foreign Relations noted that in “ Europe, the Big Three garnered further controversy over their sovereign debt ratings. While the public debt of crisis-hit countries like Greece, Portugal, and Ireland was relegated to ‘junk’ status, the agencies also downgraded the creditworthiness of France, Austria, and other major Eurozone economies. EU officials argued that these moves accelerated the Eurozone’s sovereign debt crisis, leading to calls for the creation of an independent European ratings agency.”

It is clear, the global financial system, especially as represented by US-based monopoly of the three largest CRAs, is increasingly coming under pressure. One can expect pressure to mount as signs of resistance to globalisation and the development of a more multipolar word are mounting – as represented by Brexit and the election of Donald Trump in the US.

Solution?

There is no clear and final indication to what the solution to the present situation is, or what sort of arrangements might replace it. However, both Bond and GTI hint in the same direction:

“The only reasonable solution is progressive delinking from the circuits of world finance through which these agencies accumulate their unjustified power,” writes Bond; and

“Eventually market participants will have to force a change to more independent and reliable methods of credit assessment, as it becomes increasingly clear that regulation or government intervention is unlikely to accomplish this effectively,” concludes the GTI report.

Against this background South Africa is not without some options to consider, like finding ways to unlock the potential vested in the domestic corporate sector’s “current preference to delay private investment, despite high margins and large cash positions”, in the words of S&P.

Conclusion

If government gets the fundamentals for economic growth properly in place, there will be less reason to fear what some call “state capture by the CRAs” because market forces will make their own calls.

The bottomline, however, for South Africa’s government and corporate sectors, is that the time has come to concentrate on sorting out domestic problems in the domestic economy to get it on a solid, sustainable trajectory for the developing new world order.